KPMG Knew About Shenanigans at Wells Fargo in 2013, But Didn't Think They Were Material

By:
Chris Gaetano
Published Date:
Aug 18, 2017
Wells Fargo

Big Four firm KPMG, which has served as troubled bank Wells Fargo's external auditor for 85 years, knew about the unethical and illegal conduct at the financial institution since at least 2013, but didn't feel what they found was material and so didn't note it in their reports, according to MarketWatch.

The bank, over the past year, has been implicated in one scandal after another, ranging from signing up millions of customers for credit lines without their knowledge or consent, steering people to expensive auto insurance plans, overcharging merchants for credit card processing services, and manipulating mortgage rates of home loan borrowers. 

Senators Elizabeth Warren, Bernie Sanders, Mazie Hirono, and Edward Markey wrote to KPMG this past October noting that, despite these revelations, the firm had given the bank a clean audit opinion saying that it had maintained effective internal control over financial reporting. In its response to the senators, KPMG said that it became aware of instances of unethical and illegal contact by Wells Fargo employees, including the improper sales practices that fueled its initial scandal, in 2013.

However, it noted that not every illegal act has a meaningful impact on a company's financial statements or its system of internal controls over financial reporting. KPMG auditors felt the misconduct in question, relating to the phantom accounts, did not implicate any key internal controls and the amounts that were involved did not significantly impact the bank's financial statements, and so there was no need to tell investors about it. 

The event underscores changing expectations of what audits are for and what auditors are expected to do. The recently-approved expanded auditor's report from the Public Company Accounting Oversight Board (PCAOB) was developed in the wake of increasing public calls for auditors to provide investors with more insight than whether or not the financial statements were done in compliance with U.S. Generally Accepted Accounting Principles (GAAP). The standard notes that, during public outreach, some investors said that expanded auditor's reports would have been helpful during the 2008 crisis, as they had access to more information about specific companies than most. Critics, however, did not feel investors would benefit from additional information about the audit, given the complexity of the process and potential for misunderstanding, and were concerned such measures would dilute the effectiveness of the pass/fail model. 

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